Monthly house view | January 2024

Macroeconomy

Recent data such as international trade and industrial production tend to point to weakness in the global economy, although there are some flickers of hope, including signs that the contraction in global exports and manufacturing may have bottomed out. Leading indicators for emerging economies remain better than for advanced ones. We see a significant slowdown in US growth this year. Although the chances that it comes earlier have risen, we think the first Fed rate cut will be in June, with much depending on the rise in unemployment. The pressure is also on the ECB to lower rates, especially as inflation comes down and the euro area economy flatlines. Our baseline scenario is for the ECB to start cutting rates in June, but much will depend on when the Fed moves. While there are some significant headwinds (the property sector, export weakness), we expect a moderate recovery to continue in China this year, helped by an improvement in labour market conditions and higher disposable income. We expect the Japanese economy to benefit from the latest round of fiscal stimulus and see the Bank of Japan proceeding cautiously to end its ultra-loose monetary policies, with an end to yield-curve control and negative interest rates most likely in H2. We expect Indian growth to moderate slightly, but the outlook for major north Asian economies, notably South Korea’s, may be improving.

Asset-class views and positioning

While the softening of the Fed’s messaging on rates in December may have provoked some frothiness in risk assets, the prospect of rate cuts does hold out the prospect for a broadening of market gains in 2024. Expectations for Q4 earnings are close to zero in the Europe, and in the mid-single digits for the US. Whatever the prospects for earnings, we believe cash returns to investors (including dividends and cash buybacks) could remain relatively attractive this year. At the same time, we see scope for equity volatility to rise from its current lows. Real yields mean US Treasuries look relatively attractive, despite the rally toward the close of 2023. The current level of yields also continues to make the case for investing in the bonds of cash-free, investment-grade companies, but significant spread compression makes us much more cautious on noninvestment-grade credits. We retain our strategic overweight position in gold.

Asset classes

Equities Last year was a very good one for developed-market equities, although the pullback in earnings in the oil & gas sector meant that earnings per share growth for major indexes was quite anaemic outside Japan. While positive earnings momentum and abating pressure from bond yields could continue to provide support, US equity valuations remain lofty, inflated by the so-called ‘Magnificent Seven’ tech-related stocks. Nevertheless, excitement around AI continues to feed into expectations for tech stocks, especially software and semiconductor companies. Meanwhile, valuations in a range of defensive sector, including healthcare and food & beverages, look comparatively reasonable.

Commodities, currencies In contrast with other commodities, copper prices have risen in recent months, driven essentially by increased demand for refined copper from China. Combined with its role in the energy transition in the West, Chinese demand could continue to sustain copper prices in the months ahead. Having reached a multi-year high in late 2022, the US dollar showed signs of flagging in late-2023. The timing and magnitude of Fed rate cuts will determine how far the currency weakens in 2024, while debt and deficit issues will also come to the fore.

Fixed income The decline in bond yields since mid-October gained further impetus in mid-December, when the Fed signalled the possibility of rate cuts in 2024. After the late-year rally, the scope for a further rally in bond prices may be limited, at least in the short term, as hefty rate cuts have already been priced in. Despite the rise in bond prices, the yields offered on US and core euro government bonds remain attractive. The same is true for investment-grade corporate bonds, which have greater capacity to navigate high refunding costs than their noninvestment-grade equivalents. After a year when returns for corporate bonds were boosted by spread compression, we believe the yield component will play a greater role in the performance of corporate credit in 2024.

Asian assets Asian equities underperformed in 2023, largely brought down by China, whereas equity indexes elsewhere, such as in Taiwan and South Korea, had a strong year. While cautious on the prospects for ASEAN countries in the short term and while we believe valuations in India have become stretched, tactical opportunities could emerge in China and we look forward to Asia outperforming other regions in terms of earnings growth this year. Asian investment-grade credits underperformed their developed-market counterparts in 2023, but still offer a healthy yield premium over similarly rated credits elsewhere. Meanwhile, continued concerns about the Chinese property sector have contributed to a high default rate in Asian high yield. With some exceptions, Asian (ex Japan) currencies underperformed the US dollar in 2023. But Fed rate cuts and relatively robust economies should help a range of Asian currencies this year, most notably the Korean won and Taiwanese dollar.

2024 investment themes

With a lot of important electoral contests in 2024, not least in the US, we believe fiscal and debt issues will rise in prominence, contributing to market volatility. We believe there will be ways to play this volatility through options and currencies. At the same time, we see core government bonds remaining relatively attractive as central banks move to cut rates. Indeed, we believe now is the right time to move from cash and cash-like instruments to fixed income in order to lock in current yields. In ‘safe-haven’ government bonds, our preference goes to maturities of up 10 years, while in investment-grade corporate bonds it goes to maturities of up to seven years. We continue to believe in the potential of private assets, with private credit a particular focus of interest in 2024. We will continue to prefer countries and companies where fixed-rate lending is prevalent over those exposed to variable rates. A close analysis of corporate debt structures will be an important part of our active management approach in 2024. As part of that approach, we will continue to focus on companies linked to long-term structural growth drives such as decarbonisation and digitalisation. Many of these are to be found in the industrial sector. We will also look for companies that have plenty of free cash flow for dividends and share buybacks and that are robust enough to pay down their debts. Finally, we believe that generative AI will continue to bound ahead, leading to palpable early advances in sectors such as healthcare, for example.